Thursday, January 28, 2010

The SOTU and Energy

Given the central focus of this year's State of the Union Address on the economy and jobs, I wasn't surprised to hear the President highlight "clean energy jobs"--a phrase that seems to have replaced the formerly ubiquitous "green jobs"--though I was relieved that he didn't hang the whole weight of his administration's jobs focus on them. I was even more pleased at the apparent evolution and broadening of his perspective on energy, compared to his first address to a joint session of Congress last February, when oil was only brought up in the context of its imports, and nuclear power wasn't mentioned once. By contrast, last night the President spoke of the need for expanding nuclear power and "making tough decisions about opening new offshore areas for oil and gas development." If he is serious about the latter course, he must reinforce that message with the agencies involved.

It's just as well that the green jobs refrain has become more muted, since as I've noted before, the main employment impact of energy isn't from the people who are employed producing and distributing it, as I formerly was, but from its cost and availability for the other 92% or so of the economy not engaged in some aspect of the energy business. Simply put, if we want the economy to grow at a healthy pace and create lots of new jobs, then it's more important that energy be as affordable as possible, than that we employ as many Americans as possible in the energy industry. That means we must not only increase our production of new renewable energy, which while growing rapidly contributes just 5% of our total supply, but also those sources that still account for 95% of our energy use.

If President Obama is willing to make "tough decisions" on oil and gas--presumably to open up access to them--then it is unfortunate that as he was proposing this, his Department of the Interior was engaged in a hay-throwing contest with the American Petroleum Institute over the oil & gas leasing results for 2009, which brought in $6 billion less than in 2008, just for offshore. Whatever explains this anemic performance, the record of the last year strongly suggests that this administration is a much more reluctant participant in this activity than its predecessor. Although that may please some constituencies, it hardly advances the cause of delivering more domestic energy supplies from these sources. And for Interior to cite a 14% increase in oil production last year in defense of its current practices makes me wonder how well its new management really understands the processes involved, since the time required for permitting and construction makes it extremely unlikely that the increase is attributable to leases awarded since January '09.

In order to promote the affordable energy needed for growing the economy and creating jobs, the President should also rein in efforts to entangle the most important energy development of the last decade, natural gas produced from shale and other unconventional resources, in new regulations surrounding a decades-old drilling practice that in essence involves injecting water into the subsurface, along with chemicals quite similar to those that drillers are seeking to extract from there. Promoting domestic energy will also require taking a much more pragmatic approach to climate legislation than that represented by the 1400 page monstrosity of Waxman-Markey that he praised last night, and avoiding the temptation to turn the EPA loose to regulate greenhouse gas emissions from facilities consuming the equivalent of as little as 150 barrels per day of oil, or roughly one tank truck a day.

If the President has truly begun to embrace an "all of the above" energy strategy, that would be very good news for the country. We need more energy from our abundant domestic sources--including oil, natural gas, nuclear power and renewables--to get the economy growing at a pace sufficient to generate millions of new jobs. Unfortunately, I can't help recalling that only a few months ago a top official in the Treasury Department offered Congress his view that the US was overproducing oil and gas. The onus is now on the administration to demonstrate that the energy commitments President Obama made last night will be carried through.

Monday, January 25, 2010

910 Miles Per Gallon*

Yesterday provided one of those occasional treats that makes blogging about energy so enjoyable. In conjunction with the Washington Auto Show, I had the opportunity to drive a demonstration version of the eagerly-awaited Chevrolet Volt around an impromptu test track, accompanied by the Volt's Vehicle Line Director, Tony Posawatz, who answered every question that occurred to me and many that didn't. The experience was exhilarating. For a bona fide car of the future the Volt--even in "pre-production" form--looked and handled like a real car that I could imagine myself driving around town or on a long trip, aside from its impressive technology and efficiency. That's an important distinction, since to be truly successful the Volt and its eventual siblings must be able to compete beyond a niche market of green-oriented consumers.

My test-drive of the Volt was the latest in a series of advanced vehicle experiences that includes driving a Fuel Cell Equinox a couple of years ago and goes back to a spin around Phoenix behind the wheel of an EV-1, GM's first electric vehicle, in the late 1990s. I asked Tony to what extent the Volt incorporated EV-1 technology, and his answer confirmed that while no actual parts were shared, its design philosophy and engineering DNA owe much to that earlier effort.

At first, when I drove the Volt onto the big, empty parking lot where GM had set up its test track for the DC Auto Show, I was disappointed that I didn't sense that immediate high-torque response I recalled from the EV-1--the kick that my GM contacts at the time called the "EV-1 grin." Then Tony pressed the "sport" button, and the grin was back. While my Acura might be able to beat the Volt's 0-60 miles-per-hour acceleration by several seconds, most drivers should be quite satisfied with the Volt's responsiveness and handling, even when compared to the entry-level luxury cars with which the Volt's expected price puts it into contention--and which its energy efficiency beats hands down.

The technical aspects of the Volt are fascinating, starting with the battery pack, which consists of 400 lb. of Lithium-ion batteries configured as "prismatic cells" that facilitate easier heat management than some other designs. That's a critical factor for battery life, since the battery must dissipate a fair amount of heat during its charge/discharge cycles, and its performance and efficiency are affected by ambient temperature. When plugged in, some of the energy the Volt draws from the grid is used to "condition" the battery, not just recharge it. That should help GM deliver on its expectation that the car's battery pack should last for 10 years and 150,000 miles of normal driving, over which its capacity would gradually decline, while still ultimately retaining at least 70% for later use in other, non-automotive applications. The potential after-life value of the battery could be a critical element of the lifecycle economics of a plug-in hybrid or Range-Extended Electric Vehicle like the Volt.

I was particularly interested in the battery's recharging requirements, in relation to the energy density concerns I discussed in last Tuesday's posting. The Volt recharges in two modes: At 240 V and drawing between 15-30 amps, it takes up to 3 hours to restore the roughly 50% of the battery pack's 16 kWh maximum charge used in "charge-depleting" operation--that first 40 miles or so of battery-only driving that provides the car's main selling point. Recharging on 120 V household current takes more like 8 hours. I was somewhat surprised that Tony seemed to share my view that Volt drivers are unlikely to wait until the middle of the night to recharge their cars, unless their highest priority is minimizing their electricity costs (and possibly emissions.) He has apparently been using a Volt on weekends and cited the benefits of daytime recharging at home or office to keep the battery ready for use, consistent with the main purpose of owning such a car.

The switchover from battery-only operation to driving with the onboard generator running was one of the key features I was anticipating, based on my concern that the Volt would ultimately be handicapped in low-battery, "charge-sustaining" operation by its reliance on a fairly small 4-cylinder engine. After all, the performance expectations in the category the Volt aspires to are set by powerful engines similar to the V-6 in my Acura TL, which delivers 270 peak horsepower. Well, you could have fooled me. The Volt I drove yesterday was intentionally given just enough battery charge to last about 3 miles, and when I passed that point and the little engine fired up, there was no discernible change in performance. That's apparently because the car is never really driven by the engine alone, since the battery is never completely drained. The accelerator controls only the flow of current from the battery to the electric motor; meanwhile the car's software runs the engine as needed to keep the battery charged to acceptable levels, but not to recharge it fully. That's a subtle distinction, because when I pushed the car hard in this mode, I heard the engine rev up noticeably with that characteristic 4-banger tone that provided the one discordant note in an otherwise near-luxury experience. But the trade-off was evident when I pulled the car into its tent shelter and switched it off. The cumulative fuel economy display on the dash read a whopping 910 mpg.

That result prompted an interesting discussion about what fuel economy really means in a car like this, which dutifully calculated mpg based on the tiny amount of gasoline consumed in the last lap of several miles of mostly battery-powered driving. I got a sense that GM recognizes the shortcomings of mpg in measuring such a vehicle's energy usage, though they are clearly quite focused on it as the primary metric of both consumers and the existing and proposed federal fuel economy standards. But even knowing intellectually that the car's electric efficiency, which Tony confirmed is in the range of 200-250 Watt-hours per mile, or 4-5 miles per kWh, equates to roughly 58-72 miles per gasoline-gallon-equivalent of natural gas going into a gas turbine power plant somewhere, that 910 mpg still got my attention with its implication of very rare visits to the gas station.

Recently, I indicated that while plug-in hybrids and full EVs might not yet be ready for the mass market, they do look ready for "innovators and early adopters", the folks who routinely queue up for the latest iPhone and long ago swapped out their cable set-top boxes for streaming video. If the pre-production car I drove yesterday, with the further refinements Tony Posawatz hinted would be incorporated between now and then, was any indication, the production cars that reach showrooms late this year should have early adopters salivating in anticipation, particularly with help from a federal tax credit that maxes out at $7,500 per car and for which the Volt should qualify in full. Based on his comments and my own experience with the car, there's every indication that the Volt is on track to meet its late-2010 launch target. I will be eagerly awaiting the first comment reporting that one of my readers has bought one.

Friday, January 22, 2010

Energy Lessons from Brazil

I was surprised by a headline I saw this morning: "Brazilians Call for Cut to 20% Ethanol Import Tax." At first I thought this referred to the US duty and tariff on ethanol imports, the repeal of which Brazil's President Lula has suggested to his US counterpart on more than one occasion. Instead, it seems that Brazil has had an ethanol import tariff of its own all along--who knew?--and today's call from Brazilian sugar trade association Unica stems from the recent weather-related shortfall in cane production that reduced ethanol inventories in Brazil and led to the government's temporary cut in the required ethanol content of gasoline from 25% to 20%. This situation illustrates a couple of energy lessons that don't quite square with the usual, overly-simplistic interpretation of Brazil's success at displacing oil with biofuel.

Brazil deserves recognition for its consistent approach to supporting the expansion of ethanol production from its normally-abundant sugar cane crop. The country has benefited from its government's deliberate efforts to promote the use of domestically-produced ethanol in a car fleet that increasingly consists of "flexible fuel vehicles" capable of running on widely-varying proportions of ethanol and gasoline. With an ethanol surplus and climate and geography well-suited to producing more--and much more efficiently than from corn and the other principal ethanol crops in northern latitudes--it's no surprise that Brazilians now consume more ethanol than petroleum gasoline. Yet as we see in today's news, Brazil's extraordinary reliance on biofuel creates a different kind of energy-security vulnerability, one related to crop yields rather than geopolitics. While Brazil's dual-fuel capability gives it ample flexibility to prevent a 5% drop in ethanol production for a few months from causing a crisis, just imagine the economic consequences of a comparable drop in oil production from the Middle East. Anyone advocating a complete switch to biofuels ought to ponder the potential unintended consequences carefully.

Another lesson hiding behind these ethanol statistics is that contrary to popular opinion, Brazil hasn't become energy independent because of its ethanol policies, though these have certainly helped. Rather, it is chiefly the surging output of Brazil's oil fields, which nearly doubled to 2.6 million barrels per day in the last 10 years and is not done growing, that has made Brazil self-sufficient in fuels. To put that in perspective, Brazil's oil platforms produce the energy-equivalent of 72 billion gallons of ethanol per year, or ten times its cane ethanol output. Although this was only possible because of the discovery of world-class resources off the country's coast, their development depended on consistent policies providing attractive access for the international firms that partnered with the state oil company, Petrobras, in exploring them. I wish more people in Washington, DC paid attention to the crucial contribution of offshore drilling to Brazil's appealing energy story.

As for the import tariff, I confess amusement at the inconsistency inherent in Brazilian politicians and business leaders criticizing a US tariff that exists mainly to prevent a US ethanol blending subsidy from leaking abroad, when they have their own tariff protection in place. I'd be happy to see both of these tariffs reduced or dropped entirely, but only if we finally ended our three decades of generous taxpayer support for ethanol blending. It's bad enough to subsidize domestic ethanol production from corn, but subsidizing Brazilian sugar companies to produce ethanol in their country would be a travesty, yet that's exactly what we'd do if we eliminated the tariffs without eliminating the Volumetric Excise Tax Credit, too.

Wednesday, January 20, 2010

What Now for Cap & Trade?

In the course of a single month, from the conclusion of the Copenhagen climate conference to yesterday's special election in Massachusetts, the anticipated global response to climate change has shifted dramatically. What had once seemed a likely scenario of coordinated, mandatory cuts in global greenhouse gas emissions suddenly looks unattainable, at least any time soon, and the whole approach to addressing climate change is in urgent need of a rethink. While much of the attention in last night's election was focused on the prospect of a 41st Senate vote to block pending health care legislation, the same dynamic almost certainly applies to cap & trade, at least along the lines of the Waxman-Markey bill passed last June by the House of Representatives.

I'll leave it to others to comment on the extent of the political upheaval that the voters of Massachusetts have created by sending a Republican to fill the US Senate seat held for decades by the late Senator Kennedy, and by his brother before him. Whatever this means for the administration's health care agenda, you only need to view a short video clip from Senator-elect Brown's campaign to realize that President Obama's plans for cap & trade, on which only one chamber had acted while the Democrats held a 60-vote super-majority in the Senate, look like further collateral damage from last night's result. While supporting more energy from renewables and nuclear power, Mr. Brown opposes cap & trade, or at least the version now on the table.

I'm probably in a minority of those concerned about climate change who welcome the demise of the Waxman-Markey approach. As I've noted before, it made little sense to adopt a methodology designed to create a level playing field for energy technologies based on their emissions, if it was established on such an intentionally-uneven foundation of excessive free allowances handed out to favored sectors and constituencies. And on top of its basic flaws, Waxman-Markey exemplified the recent Congressional tendency to load up any big bill with mountains of pork and reams of tangential provisions.

Does this mean cap & trade itself is now dead? I hope not, because I believe its underlying concept remains the most efficient way to recognize the cost of the environmental externalities associated with our use of fossil fuels--which cannot be replaced overnight--and to shift our energy habits toward greater efficiency and a growing reliance on more sustainable energy sources. But the politics of that now look challenging, particularly in an election year that is shaping up so unpredictably. Democrats still hold commanding majorities in the Senate and House, but no bill without bi-partisan support could get past a cloture vote in the Senate. That gives greater leverage to the negotiations of Senators Lindsey Graham (R-SC) and John Kerry (D-MA) for a bi-partisan climate bill incorporating much broader support for domestic energy production--something that might be marketed as a genuine jobs bill without the cynicism of "green jobs" hype.

It also shifts attention to the EPA's Endangerment Finding on CO2 and that agency's proposals for regulating CO2 emissions. Last week the Washington Post was shocked by the apparent involvement of lobbyists in drafting proposed legislation to block any action by the EPA. Did their editors ever bother to scrutinize Waxman-Markey, which read like a lobbyist bonanza? Either way, extending the regulations of the Clean Air Act to CO2 would be a very expensive bad idea. CO2 is only a pollutant in the traditional sense by legal courtesy, and regulating the primary result of all carbon combustion in the same way we regulate much more easily managed fuel impurities and combustion byproducts like SOx and NOx--for which the term "Best Available Control Technology" actually has some meaning--looks orders of magnitude more expensive than a system that channels emissions reductions to the lowest-cost sources.

With a 52-47 election victory for Scott Brown, voters in Massachusetts have completed the work begun in Copenhagen of upending the best-laid plans for dealing with climate change. Instead of a binding global treaty to replace the expiring Kyoto Protocol, we have the voluntary goal-tallying of the Copenhagen Climate Accord, and instead of legislative momentum towards mandatory cap & trade in the US, we have renewed uncertainty and the necessity of a scaled-back bi-partisan approach--if any at all this year--that must focus more on what we should add than on what should be taken away--with the threat of EPA regulations and endless legal wrangling over them lurking in the background. I'll be very interested to see what emerges from this.

Tuesday, January 19, 2010

EVs and Energy Density

If the new vehicles on display at this year's Detroit Auto Show have you wondering whether 2010 might be the Year of the Electric Car, you're not alone. GM's Volt plug-in hybrid is due out this fall, and purely-electric options like Nissan's Leaf aren't far behind. The global auto industry is investing billions of dollars in developing this technology, and the US government is putting up additional billions in loan guarantees for EV manufacturers and consumer purchase subsidies. No one should dismiss the seriousness of these efforts or their potential to reshape the vehicle and transportation energy markets over the next couple of decades. At the same time, their ultimate success depends on whether a combination of improved technology and significant changes in consumer expectations concerning vehicle performance and characteristics can overcome the core challenge of vehicle electrification: either matching the effective energy density of liquid fuels or giving up the flexibility they provide.

Understanding the practical consequences of energy density, which refers to the amount of energy that can be stored in a given volume or mass of fuel or battery, requires putting electricity and fuels onto a common basis of comparison. Although I've generally tended to do this in terms of gallons, barrels or BTUs, for a change I'd like to consider the fuels we commonly use in terms of their equivalent electrical energy. The units may be less familiar at first, but this should make a side-by-side comparison with the battery capacities of new electric vehicles (EVs) easier.

According to the Department of Energy a typical gallon of gasoline delivers 116,000 BTUs of energy, and a gallon of diesel fuel 128,000 BTUs, based on their lower heating values. Converting to electricity units gives us 34 kilowatt-hours (kWh) per gallon and 37.5 kWh/gal., respectively. Using typical volumetric densities for these fuels, I come up with figures of 5.5 kWh/lb. for gasoline and 5.3 kWh/lb. for diesel. By comparison, the battery for the extended-range GM Volt hybrid, which is rated at 16 kWh, appears to weigh 400 lb., yielding an energy density of just 0.04 kWh/lb., or less than 1% of the energy density of hydrocarbon fuels. If this were the entire story, EVs would look like a hopeless proposition, and we could dismiss them for another generation.

The factor that helps to bridge the enormous gap in energy density between the best batteries and liquid fuels is efficiency. While neither electric motors nor internal combustion engines (ICEs) can turn 100% of that stored energy into motion, the EV motor has an efficiency advantage of roughly 4:1 over ICEs. Even after taking that into account, we're still left with a requirement for roughly 25 lb. of batteries to deliver the same range as a pound of gasoline, with the effective useful capacity of the Volt's entire battery pack storing the equivalent of no more than one gallon of unleaded regular. Plug-in hybrids like the Volt cleverly finesse this limitation by using on-board generators running on liquid fuels to extend their range. Of course this entails big trade-offs of cost and weight, but the designers of such vehicles hope to come up with a mix that will satisfy consumers who are accustomed to cars that can go 300 miles without provoking "range anxiety".

In some respects the bigger concern related to energy density might be the one that proved to be the Achilles' heel of GM's first effort to produce a consumer-friendly electric car, the EV-1. To understand why recharging EVs is such a tough problem, let's take a look at your last visit to the gas pump in terms that would never occur to most people. Gas pumps in the US are limited by EPA regulations to deliver a maximum of 10 gallons per minute. Half that is probably more typical. But even at 5 gallons per minute, the gas pump is "recharging" your car at the power equivalent of 10 megawatts (MW), effectively delivering the entire daily power consumption of the average US household every 12 seconds. Even if you discount that figure by the lower conversion efficiency of an internal combustion engine, it's still the equivalent of a couple of megawatts. Matching that for an EV would require either stupendous voltages or currents well above most designers' comfort level. For example, a car recharger drawing 100 amps would have to operate at 25,000 Volts--more than ten time the voltage of the electric chair--to deliver a comparable charge in the same interval. At the 240 V of your home's appliance circuit, you'd need about 10,000 amps--similar to what a transit train draws from the "third rail." Almost inevitably, the safe recharging of EV batteries must take longer--hours longer--than refueling your gasoline vehicle, or entail clever-but-costly workarounds such as the battery-swapping scheme of Better Place and other firms.

From the above it's hard to avoid the conclusion that EVs and plug-ins might not be quite ready for prime time. However, I was struck by a comment from a GM official cited in a New York Times article on the Detroit Auto Show, concerning the need for first-generation EVs to pave the way for an eventual mass market. There's every indication that these cars will shortly be ready for "innovators" and "early adopters." The Volt, Leaf, and cars like them will prove out not just the technology of vehicle electrification--a trend that began with the original Honda Insight and Toyota Prius and still looks like the strongest competitor to the ICE in the long run--but also the response of real drivers who aren't engineers or environmentalists. My own experience with energy density in the more modest realm of battery-powered lawnmowers suggests that this will require adapting our expectations and usage patterns to this new vehicle type, rather than treating it as plug-and-play in our current lifestyles. In the meantime, the automotive mainstream has some very attractive non-plug-in options for getting the most out of the energy density of our current fuels, based on the steadily-growing variety of conventional hybrids, advanced diesels and downsized gasoline cars with direct injection and other innovations.

Friday, January 15, 2010

2009 US Petroleum Trends

The American Petroleum Institute (API) released its annual oil statistics for 2009 to the press yesterday afternoon, and I participated in their media teleconference this morning covering the results. The numbers reveal some interesting shifts, and they provide another useful barometer on the state of the US economy, for which oil is still the largest energy input by a wide margin. Total petroleum and refined products deliveries, reflecting aggregate demand, continued their downward trend last year, averaging 4% below 2008 levels, but interestingly were only down 1.8% in the fourth quarter, compared to 4Q08, with December actually showing a slight uptick vs. December '08. Here are a few of the underlying details that caught my eye, and my reactions to them:
  • Gasoline bucked the overall downward trend in product demand. Despite prices that recovered steadily throughout the year from their late-2008 lows and surpassed their year-earlier levels in the fourth quarter, gasoline demand posted a 0.3% increase vs. 2008, with 4Q09 showing a 1.1% rise compared to 4Q08 and an even stronger finish in December. This is entirely consistent with the observed reversal of the decline in vehicle miles traveled, which still dominates improvements in fuel economy, despite the Cash for Clunkers uplift.
  • In contrast, diesel demand remains very weak, with the low-sulfur and ultra-low-sulfur diesel deliveries that correlate with goods shipments and overall economic activity running at 7.5% below 2008, with little or no improvement in 4Q09. (Are the results of recent gains in economic activity mainly replenishing depleted inventories?)
  • US refineries operated at less than 83% of their nameplate capacity for the year and fell below 80% in December. The poor margins this creates are buffeting oil company earnings but buffering consumers from the full impact of recent increases in oil prices. If utilization stays at such low levels, a major shakeout in refining could be coming, beyond the refinery closures we've already seen. This will be exacerbated by the completion of major refinery expansions on the Gulf Coast, including Marathon's Garyville, LA refinery project starting up now and the more-than-doubling of the former Texaco Port Arthur refinery, now owned by a joint venture of Shell and Saudi Refining, due within a few years.
  • US imports of crude oil and petroleum products fell by over 9%, with products taking the biggest hit, proportionally, falling by half a million barrels per day. This is good news and bad news, since much of it is the result of the weaker economy.
  • Happily, roughly a third of the drop in imports was attributable to higher US production of crude oil and the liquids accompanying higher natural gas output--a byproduct of the shale gas boom. As API's Chief Economist John Felmy pointed out in the call, that was partly the result of a year without major hurricanes in the Gulf of Mexico. However, it also validates the time lags involved in bringing on new production triggered by the spike in oil prices that began in 2003-4.
  • The mix of our foreign oil suppliers is also shifting, with lower imports from Mexico--production there is collapsing--and Venezuela, two of the mainstays of our supplies over the last several decades. Despite this, imports from the Persian Gulf made up just 17.5% of the total through October, compared to 22.5% from Canada. And although they didn't make the top 10 list this year, imports from Brazil are coming on strong. This is a testament to that country's policies for developing its vast new resources. Look for Brazil to enter the top 10 list this year, as Mexican output continues to drop and Brazil surges.

I'm sure I missed some other nuances, and I regret not being able to provide links to the original figures, since access to the data requires a subscription. I'm sure I'll be commenting on many of these trends at greater length and referring to public data from the Energy Information Agency of the Department of Energy, as they become available.

Wednesday, January 13, 2010

Big Wind

Even with my long experience in an industry dominated by big structures and gargantuan flows of liquids, gases and power, I was impressed by the scale of last week's announcement awarding the third round of the UK's offshore wind licensing program. The 32,000 MW of wind turbines planned for installation in the waters around Britain over the next ten years or so would match the entire onshore wind capacity of the US, to date, while delivering perhaps a quarter more energy annually, because of their larger size and access to more reliable wind. With the UK facing a significant shortfall in generation and energy output, this isn't just about responding to climate change. Yet big wind won't come cheap, and it's worth spending a few moments putting its scale and cost in perspective.

Round Three of the UK Crown Estate's offshore wind bids dwarfs both the country's 4,000 MW of existing onshore and offshore wind capacity and its first two rounds of offshore licensing. When completed, the turbines in the nine offshore zones awarded last week would generate roughly the same amount of power annually as a dozen nuclear power plants, based on a 40% capacity factor, and considerably more when the wind is blowing strongly. That's directly relevant, because Britain's aging fleet of nuclear power plants is being phased out, and by the time the first of the new offshore wind farms is done, UK nuclear generating capacity could be less than half its current level of around 11,000 MW. If proposed new reactors are delayed or never built, the UK would be down to a single nuke by 2023. It's an interesting coincidence that some of the same companies from continental Europe that participated in Round Three are also involved in the nuclear new build proposals.

Unfortunately, the retirement of the UK's nuclear fleet coincides with the decline of the North Sea gas fields that have powered Britain's shift away from coal in the last couple of decades. The amount of electricity that the Round Three turbines would generate annually is equivalent to around 2.5 billion cubic feet per day (BCFD) of natural gas run through gas turbines. That equates to 38% of the 6.6 BCFD of gas the UK produced last year, or roughly the amount by which UK gas output has declined since 2004. That makes offshore wind a significant contributor to the country's energy supplies, but not the whole answer by itself.

Nor will big wind come cheap. At a reported £3.1 million per MW, the estimated cost for the Round Three build-out comes to almost £100 billion ($161 billion at current exchange rates) not counting National Grid's estimate of £10.4 billion to connect these new wind farms to the onshore power grid. It also doesn't count the substantial subsidies involved. In the UK, those come mainly from utilities--and ultimately power customers--via a system of tradable Renewable Obligation Certificates (ROCs) issued under the country's Renewable Obligation, which is similar to the renewable portfolio standards mandated by many US states. At present, offshore wind projects can earn 2.0 ROCs per MWh generated, though that could fall back to 1.5/MWh before some of these wind farms come onstream, creating some financial uncertainty. At the recent ROC value of £45, the winners of Round Three could be earning as much as £10 billion per year ($16 billion) from the sale of ROCs to utilities needing to meet their renewable quotas. With this subsidy factored in, the cost of the UK's big wind aspirations will run well over £200 billion over the next decade.

I can't help admiring all this as an engineering feat and demonstration of will, despite the enormous cost. It's a tougher call whether the US should be pursuing something similar. The UK has fewer energy options than we do, particularly for solar energy. You don't need maps of solar irradiation to know that it's not a very sunny place, and Britain gets points for not pursuing the kind of misplaced solar mania that Germany has. And with North Sea oil & gas in decline and no big surge of shale gas waiting in the wings, combining large-scale wind with nuclear looks like a sound energy strategy. At a minimum, the UK's plans demonstrate greater seriousness in dealing with energy more realistically than the US is able to manage. We can't even seem to differentiate between domestic vs. imported oil, and we've allowed the influence of a few wealthy residents to block the first offshore US wind farm for years. Big wind, with all its limitations of intermittency and non-dispatchability, might not be the answer here, but we need big something--probably big everything--and we had better get on with it. Our continued status as a global superpower ultimately depends on it.

Monday, January 11, 2010

Oil Prices and the Recovery

As oil prices continue their upward trend, I'm noticing more articles and getting more comments from readers questioning whether $80-plus oil could squelch the nascent economic recovery--or for those who believe the recession isn't over, deepen it again. It's not an unreasonable question, particularly when we compare current retail fuel prices to their level of a year ago: the "gasoline stimulus" that I was tracking for much of last year. A quick glance at the chart below reveals that instead of paying a dollar or more per gallon less than twelve months earlier, as we were for much of 2009, the average US retail price for unleaded regular is now roughly a buck higher than it was the same time last year. That can't be favorable news for consumers or for businesses depending on a resurgence in consumer demand for other goods and services. But is it enough to stall economic growth?

Although I still check oil prices on a regular basis--at least every couple of days, instead of every few minutes when I was trading the stuff--sometimes I notice price trends the same way most of my readers do: by driving by neighborhood gas stations and watching the most visible price in America change day to day. The recent steady, counter-seasonal rise against the backdrop of generally slack demand and comfortably high inventories, and in the absence of any significant global supply disruptions has had me a bit perplexed. And it's really all down to oil prices, since refining margins remain fairly weak and are only as strong as they are as a result of several refineries being shut down entirely and most others running at historically low rates of throughput.

Nor does this seem to be an instance of what I've called the oil-dollar price loop. Since December 11, 2009 crude prices are up by 18%, despite the US dollar strengthening by 3% against the Euro and 5% against the Japanese Yen over the same interval, amid a general surge of commodity prices.

Most analysts seem to attribute higher oil and commodity prices to higher demand from countries like China, as the global economy responds to the impact of various stimulus packages and the stabilization of the banking system. China's growth has been particularly impressive, but even if this is boosting its demand for oil imports by 25%, as one source suggested, that hardly seems likely to swamp the substantial spare capacity that OPEC has accumulated in the last year and a half. As I noted last week, OPEC has successfully held over 3 million barrels per day off the market and maintained global oil prices at a level that wouldn't be possible based only on renewed economic growth in China and its anticipation by the market elsewhere. OPEC has attracted remarkably little flak for this policy, which a year ago probably prevented oil prices from going into free fall. That would have harmed all producers, and eventually consumers, too, by drying up future supplies.

So what's the financial impact of OPEC's self-restraint on US consumers and our economy? Even if you ignore the year-earlier comparison, current retail gas prices are around 30 cents per gallon above their average for last year. For a household driving 25,000 miles per year in typical cars, that's worth at least $25 per month. Across the entire 138 billion gallon-per-year gasoline market, that aggregates to around $40 billion/year. Applying the underlying $13/bbl oil price rise since mid-December to our net oil imports of roughly 10 million bbl/day, that figure increases to just under $50 billion/year.

As unwelcome as this additional drag on the recovery might be, at current levels it seems unlikely to further derail our $14 trillion economy, even if it contributes several billion dollars a month to our trade deficit and, along with high unemployment, depresses consumer confidence. However, near-$3 gas is one thing; widespread expectations of a return to $4 per gallon would be quite another. While higher oil prices mainly due to OPEC restraint aren't yet a cause for panic, this trend certainly bears watching.

Thursday, January 07, 2010

The Dependence of Renewables on Government

As I was catching up on a large backlog of articles from December, I ran across one from the New York Times that dovetailed with my thoughts about trends to watch this year. It concerned the difficulties being experienced by US green energy companies, particularly relative to competitors operating in countries with more generous subsidies for renewable energy manufacturing and deployment. Instead of becoming progressively less dependent on help from the government, many of these firms are even more reliant on aid as a result of the financial crisis, which disrupted their access to credit and capital from the market. This is a worrying development, because it tends to shift the focus of management away from the attainment of operational excellence and profitable innovation, and toward the task of lining up a steady pipeline of government grants and tax credits. This might be necessary for the moment, but it undermines long-term competitiveness.

As I read the article, I was struck by some of the comments from industry executives, which included a complaint from the US arm of a Spanish wind turbine manufacturer about the lack of necessary legislative support for the industry, and this astonishing remark from a director of the Pew Charitable Trusts' Environment Group, "But if we don't have the policies in place to make investment here a sure thing, then we could potentially lose to other countries." I wasn't aware that it has ever been the proper role of government to ensure that any business is a "sure thing." And then there was a comment from the head of the Solar Energy Industries Association to the effect that the US would have a bigger solar sector if our incentives were more like those in China, where "80 percent of the entire cost of a factory and worker training is paid for by the government." No doubt.

There's something deeply corrosive about such attitudes, and they put anyone investing in renewable energy in a difficult position. Now, there's a strong argument that some level of government support is necessary to help renewable energy compete with traditional energy sources that operate in a market that doesn't account for significant externalities such as environmental and energy-security effects. That's one of the main arguments for establishing a cap & trade system for greenhouse gases, or a carbon tax. Yet we now see government not only helping to level the playing field by means of renewable energy tax credits for investment or production and mandates requiring a set percentage of energy to come from renewable sources, but also playing the role of venture capitalist and banker. These are roles for which government is ill-equipped, not least because the necessary Darwinian feedback mechanisms don't exist. A VC that consistently invests in impractical ideas or start-up firms with incompetent management will eventually run out of capital and close its doors; a government agency with a similarly poor track record will continue to be funded, and its employees will enjoy their customary job security.

Of course, renewable energy firms aren't the only ones to have enjoyed generous government support as a result of the stimulus and other measures put in place to address the recession and financial crisis. The key difference is that while the government has poured billions of dollars into banks and carmakers, no one doubts that well-run banks can function without government aid and that it's possible to make and sell cars at a profit in the US--Ford and several foreign carmakers with US factories prove that every day. Unfortunately, we don't know that it's possible to produce renewable energy or the hardware it requires without government support for users, producers, developers, manufacturers, or all of the above. That acts as a deterrent to established energy companies that have, through painful experience, acquired a jaundiced view of the long-term dependability of such support. Anyone questioning that view need only ask someone in the US biodiesel industry, which just lost its $1-per-gallon subsidy and now faces oblivion.

As necessary as the continued expansion of renewable energy sources is for our long-term transition away from fossil fuels and for reducing greenhouse gas emissions, I worry that the green energy sector has become caught up in an industrial policy fad that has little to do with either emissions or energy security, and that hinges on exaggerated expectations of cleantech as the next hugely-profitable global industry and massive provider of stable, high-income employment. Yet if that profitability is merely the result of a government-mediated transfer of wealth from consumers and taxpayers to a group of fortunate firms, rather than of improvements in productivity or pervasive new consumer values, then neither those profits nor the jobs that go with them will be sustainable. And sooner or later a government less committed to these subsidies, or more focused on reducing unmanageable deficits, will take office and the gravy train will end quite suddenly.

I'm not advocating abandoning the renewable energy sector to the tender mercies of the market overnight, or ceding this important sector entirely to non-US firms, nor am I ignoring the lessons of the last two years about markets. However, I'm also recalling the lessons of the Tech Bubble. At least until we have cap & trade or a carbon tax, some level of support will be necessary. However, it should be uniform, picking no winners and treating all low-emission BTUs and kWhs equally. It should also phase out on a reasonable but firmly-established timetable, so that companies know they must become truly competitive. And instead of extending the Treasury's renewable energy grant program beyond its current October 2011 deadline, the government should focus on enabling the restoration of the flows of private capital for which the grants are filling in--and inadvertently stifling in the meantime. Nor should we seek to emulate the foolishness of Germany's extravagantly-generous feed-in tariffs for solar power, which created a market for German manufacturers that is now being lost to foreign competitors with lower costs.

Our goal ought to be a renewable energy sector that can stand on its own, rather than one that, like the US ethanol industry, has been tethered to federal life-support since the precursor of today's Volumetric Excise Tax Credit was established in 1978. The result would likely yield fewer US renewable energy companies, but also stronger ones better able to survive the turbulent energy transition that lies ahead.

Tuesday, January 05, 2010

2010 and Beyond

The start of my seventh year of blogging on energy and its related environmental concerns coincides with the start of a new decade, unless you're of the traditional school that believes the twenty-teens don't really begin until next January 1. Over the holidays I was struck by the number of retrospectives focused on the amply eventful, but profoundly disappointing decade that was ending. Having spent several years reassuring my readers that we weren't reliving the 1970s, in retrospect I'm not so sure. Yet as bad as the '70s were on so many levels, they gave birth to the '80s, which brought revitalization and tremendous technological developments, and culminated in the end of a Cold War that most of us had considered perpetual. There's cause for guarded optimism about the decade ahead, particularly for energy, which is still in the early stages of a massive transformation. The 'Teens will test the capacity of current energy systems to support a return to rapid economic growth and of new energy technologies to go from niche to mainstream.

I could fill the rest of this posting with grandiose predictions about the next ten years, but instead I want to focus on two stories that could provide early clues about energy in the crucial 2010-2020 period. The first almost escaped notice in the energy retrospectives I read last week. Many of them, including one in the Wall St. Journal, attributed the recovery of oil prices in 2009 mainly to the stabilization of the financial system, yet scarcely mentioned the essential role of OPEC's self-restraint. According to the figures in the latest public version of the International Energy Agency's Oil Market Report, between May 2008 and February 2009 OPEC reduced its output by more than 10%, taking well over 3 million barrels per day (MBD) off the market in response to a 3% drop in global oil demand. Despite the usual cheating on its official quotas, its members have avoided the competition for shares of a shrinking market that crashed oil prices from the $30s to $11/bbl in the mid-1980s and set up a decade of low oil prices.

In the process, OPEC's spare production capacity has expanded from less than 2 MBD to roughly 6 MBD. That's quite a buffer against a big price spike as the economy recovers, though it's also the reason oil isn't drastically cheaper than it is today. While we can't know precisely what would have happened if, for example, Saudi Arabia had tried to squeeze the output of its new, Texas-sized Khurais field into the market on top of its existing sales, it's a good bet that oil wouldn't be trading anywhere near its current $81/bbl. The reason this is relevant for the decade ahead is that OPEC could be forced to accommodate even bigger increases from the production agreements recently signed in Iraq, along with more reliable output from Nigeria, if that country's ceasefire with rebels in the Niger Delta leads to a lasting resolution of the problems there. With many of the world's best onshore oil prospects currently off-limits for anyone else to develop, OPEC's members and their continued cohesion hold one of the main keys to oil prices in this decade.

Meanwhile the growth of renewable energy faces a number of important tests as it expands beyond the scale at which it can be tucked safely out of sight and out of mind. We've already seen large solar projects in California's Mojave Desert--one of the most reliably sunny spots on the planet--canceled or relocated to accommodate concerns about wilderness preservation, and now I read that the long-suffering developers of the Cape Wind project off Cape Cod are at risk of having the project's location declared a Historic Site by the National Park Service. With all due respect to the local tribes that apparently consider Nantucket Sound to be sacred, it's worth recalling some of the other history of the region that ought to bear on such a finding. In its heyday Nantucket Island was the center of the global whaling industry, made possible by a fleet of tall-masted sailing ships that used wind power to harvest a key energy resource of the time, from the slaughter of whales for their oil. It's hard to think of a better way to recognize that history--and in a more environmentally-sound 21st century way--than by putting up offshore wind turbines to harness the wind for direct energy production.

And while the permitting for America's first offshore wind farm drags on interminably, the UK government is expected to announce the results of its Third Round of offshore wind bids this week. The new installations would add 25,000 MW of new capacity to a base of offshore UK wind farms in operation or under construction that is already about four times larger than that contemplated for Nantucket Sound.

Oil prices and the expansion of renewables are only two of many factors that will determine the shape of the world's energy economy in 2020, though they rank high on my list of things to watch as the decade begins. Tight oil supplies and high prices would do a lot to promote energy efficiency and new vehicle technologies, while lower, more stable prices might result in a return to the complacency we saw in the late 1980s and '90s. And although renewable power sources are hardly the only means for reducing greenhouse gas emissions and rendering our steadily-growing energy use more sustainable, much depends on the capability of wind, solar and geothermal power to continue their recent impressive expansion. That's true whether you are banking on cleantech and "green jobs" to turn around the US economy or merely interested in the size of the potential opportunity for our suddenly-ample natural gas supplies. I look forward to sharing my observations about these and other trends in the months and years ahead.